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The piece that caught my attention, however, was a story from Edmund L. Andrews called “My personal credit crisis”. Andrews is a smart man, and a long-time economics reporter for The New York Times. You might think this would keep him from making financial mistakes. But you’d be wrong. He writes:

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds.

Andrews’ story reads like a textbook example of how the housing market went awry. He and his wife had excellent credit, and so decided to stretch to afford the house they wanted. They gambled. They embraced the “get rich quick” mindset, which is never a good idea. You cannot cut corners and succeed.

Despite nagging doubts, Andrews and his wife continued to make choices that moved them from a position of relative comfort to deep debt — and crumbling credit. Along the way, they had plenty of help:

“Don’t worry,” Bob [a loan officer] reassured me, saying what almost everybody else in real estate was saying at that moment. “The value of your house will be higher in five years. You’ll be able to refinance.”

As I walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad…but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun. I couldn’t help feeling like a high roller, a sophisticated player who could lay his hands on big money at a moment’s notice.

I’ve read a lot about the sub-prime mortgage crisis. I’ve even written a little about it, documenting my brother’s own battle with foreclosure. But most of the information I’ve come across has been second-hand. This story is told by the man who lived through it, and it provides an interesting glimpse into his motivation and rationalization.

I did the same thing as everyone else – I bought real estate without putting enough money down, when it was overpriced. Boy do I regret it – if I had it to do over again, I would never have purchased my condo.

I think the worst part is how being underwater on your mortgage limits your options. If I’d been thinking rationally, as opposed to thinking “I want to be successful, the next thing I need to do is buy a home” I would have waited. Luckily, I’m in a situation where I can rapidly pay down my home – if I weren’t, I don’t know what I would do.

I read that piece yesterday and found myself wondering if he ever had a written budget and what he’s been doing with his money for the past 8 months since he stopped paying his mortgage. What’s his plan now? The article felt like a confessional and therapeutic for him and maybe validating for other people that made bad decisions. But it wasn’t really informative! What has he learned? What is he doing differently now?

I just wished he spent a little more time explaining the big question – why would a smart person do such a dumb thing (or series of things)? Probably you have to buy the book to find out. He explains how he had written articles on all the dirty tactics that he himself was using like the liar’s loan, etc and how he knew that he could not afford the mortgage he was getting. It sounds like he made the bid on the house before even qualifying for a mortgage. Why did he think he could do this? It’s so absurd.

I also thought the article highlighted how communication with your spouse is key. From what he writes you can see that he and his wife had a complete communications failure about money. He was trying to bring it up with her, and she thought he was trying to guilt trip her or accuse her. I suspect he was not approaching her in the right way. If she knew they were at risk of losing their house, I am sure she would not have been frittering away money at the Gap and J Crew. If they had done a better job with just sitting down and talking about money, they could have changed their lives before falling into the debt trap.

This is the scariest story I’ve read in a while. The downward spiral is horrible, right to the point where the man is at the end of his rope, and finds himself utterly alone when the woman just shrugs him off.
They should make a country song about this story.

I read that article a few days ago and was really disturbed by the fact that he knew what he was doing and did it anyway. Then he wants us to feel bad for him because ‘it could happen to anyone’? I don’t think so. He admits he was defrauding the bank and comes across as rather smug that he hasn’t made a payment in 8 months (and doesn’t seem to believe he will ever be required to make those payments).

I think this goes to show how anyone can really get caught up in the hype of all of it. So much so that we don’t even sit back and think about what we are doing. When you feel desperate you can make really dumb choices, or maybe the better way to say it is when you use your emotions to make money decisions, which is hard not to do you can make some pretty dumb choices. The good thing is the author realized that there were more important things in life, and I do believe he has learned his lesson even though it has been the hard way.

J.D. – (don’t need to post this comment) but I was checking the copygator.com site for people scraping content from some feeds I manage and typed in your site just to see how prolific the infringement is. There are a few sites listed that are scraping your content:

I didn’t realize credit cards companies might know so many details as to what I buy at stores. I thought they would only know what stores I shopped at. It does make me wonder what profile they have on me and how long they go back to make the profile. Since I’m still fairly young I’m still establishing a pattern of what I buy and how much.

What bothers me is that this man seems to be keeping a large piece of property that he “owns” (his house) while not paying for it for the last eight months, therefore living there rent/mortgage-free, while his credit accounts are in great shape (courtesy of the house that is not being paid for) and his retirement accounts appear intact.

I, on the other hand, lost most of the only assets I owned (retirement/other stock accounts) while paying well over a thousand each month to rent a three-bedroom apartment, like I’ve been doing for the last eight YEARS, for my family of six. My credit accounts are reamed out and in lousy shape (but in good standing) because I pay my bills, even when it means losing my assets (my stocks, the only thing I’ve ever owned.)

“The value of your house will be higher in five years. You’ll be able to refinance.”

Ugh, yep, those exact words came out of the mouths of both my real estate agent and my mortgage broker. Now I’ve got an ARM that just adjusted upward in November and may do so again this November, and I can’t refi because I’m $17K underwater, yet I’m too stable financially to qualify for any of the assistance being offered.

Why did I do it? I just wasn’t aware there was a real estate bubble. Didn’t know properties’ prices were inflated artificially (when I comparison-shopped, the prices were all comparable, so how would I know?). I wanted to buy a home, and I stupidly trusted the advice of the people who were selling to me. Naive, huh? The funny thing is, they really were nice people, especially my realtor–I’m still on friendly terms with her. I don’t think they even knew they were blowing smoke up my ass.

What do you mean no one is immune, Moneymunk. I am immune and so is anyone else who actually thinks and uses some common sense. This isn’t a situation that is caused by a random event out of the author’s control. He most certainly had the ability to say “no” just like I and you do to every choice in our lives.

I have always lived well below my means so I don’t find myself in situations like this. Whatever happened to being responsible for one’s decisions? What really makes me mad is that I am the one who will end up paying for his poor choices. In that reagard I am not immune and neither are any of the other responsible people out there.

Emma, no one is immune to magical thinking. It just shows up in different ways. My fixed-rate mortgage is not a financial hardship in part because we bought under our means and went with a fixed-rate mortgage. On the other hand, I wanted to believe my mother would finally accept me the way I was, and was always left hanging.

His problem is not his mortgage. It is his and his wife’s out of controlled spending caused major part of the problem. He is an economics writer for NYT and he doesn’t know how to balance his checkbook. Gosh. No wander this whole newspaper industry is going down down. Even thinking about our government might bail out this jerk with my tax dollars make me angry. May I should stop paying my mortgage and get a second loan to go on a extravagant vacation, buy stuff I can not afford while sipping Starbucks coffee. Wait, I am drinking Starbucks coffee for free at my office, and I have to say it is not that great, at least it is not as great as what I pull out from the espresso machine I got from a great deal.

It most certainly can happen to anyone since we were all being fed a pack of lies from the builders to the sellers to the realtors to the brokers who were laughing all the way to the bank. There were people who played hard on the emotions of potential buyers…and so it goes. I think from now on I will always make that my #1 financial rule–to not make any financial decisions based on my emotions! Thanks, J.D. for keepong it real!

“The value of your house will be higher in five years. You’ll be able to refinance.”

I just don’t understand how can people buy this crap again and again. Even if your house value goes up in five years and you can refinance it, you still can not lower your mortgage, unless the mortgage rate get significantly lower, so at that moment will face a much higher monthly payment. You mortgage is your debt, there is no way to get rid of it without paying it off.

I can see how some people are duped. Some don’t understand finances to start, and they trust “the experts” in the transaction.

This guy obviously knew better, but people get tempted by the dangling carrot. I find it happening to me every now and then, but when I get overly excited about something, I know it’s time to stop and think before I act.

For example, right now we’re in the first stages of building our house, and looking at fancy kitchen appliances had me salivating and thinking of stretching our conservative budget. Then I read that Mark Bittman, food writer and cookbook author, has a small oven that has to double as storage space. Brought me back to earth. Yeah, we have a passion for cooking, but no, we don’t need a Viking to work magic in the kitchen.

DH and I aren’t in trouble, mostly because we grew up in the midwest, where the scariest statement you can make about anything is “That sounds risky!” We always plan for the foreseeable worst case, and make sure we’ll be OK living with that.

In our minds, it was a matter of when the stupid mortgage lending and overpriced houses were going to correct, not if. We factored the likely correction into all our real estate purchases. Whatever long-term financial commitments we make have to make sense with our foreseeable worst-case cash flow scenario. That’s why we’ll never own my fantasy lake house.

And the “new economic rules” that said that real estate only went up? Didn’t they say the same thing about internet stocks in the late 1990′s? Wishful thinking doesn’t make more sense if you change the investments.

Andrews himself admits that the major reasons he went along with the new house and mortgage was because he wanted so badly for things to work out with his new wife. In other words, his emotions were driving the process, not his brain. An exciting, but risky way to live.

@XW #19
“I just don’t understand how can people buy this crap again and again….unless the mortgage rate get significantly lower, ”

XW, that’s exactly what would happen. A sub-prime mortgage has a higher rate (at least after the introductory time) because it is riskier, and because your percentage borrowed is higher at the time of purchase. BUT if your house increases in value, then your existing mortgage represents a much lower percentage of your home’s value, therefore is less risky for the bank, therefore attracts a lower rate of interest. So in 5 years time they could remortgage to a lower rate and make it more affordable.

Wow, this is shocking! I wish he had provided more information about how he managed money when he was in his first marriage. I hypothesize that wife #1 was a saver and handled most of the day-to-day budgeting and financial planning. Wife #2 doesn’t seem too interested in doing that and appears to be more of a spender.

The other thing I wondered about was why wife #2 wasn’t receiving any alimony and/or financial support from her former husband. If she supported his career for 20 years by not working, surely she would have been entitled to some support, not to mention child support for the kids living at home. Did I miss something?

It does sound like he had a budget, but it was based on assumptions instead of reality. He made all of his plans based on a fantasy budget where wife #2 had a great job, instead of his real budget which was quite low. Too bad he couldn’t have delayed gratification and found a lower cost living situation until she actually landed the great well-paying job and they had built up some emergency savings.

Well yes, you can and many people do. Take all those mortgage brokers and investment bankers. They went to the bank with the proceeds from cutting corners.

Most of this money didn’t just disappear, it ended up in someone elses pocket. I know, I’m one of them. We sold our house in 2005, a bit before the peak, for a little over three times what we paid for it. We weren’t smart, just lucky. We had to move for a job.

A lot of the money from the bubble ended up in the pockets of investment bankers and mortgage brokers. And its still there. But some of it ended up paying for a very nice lifestyle for home flippers.

The key thing to understand is that anyone who failed to sell their house at the peak of the bubble was just as financially foolish as someone who bought at the peak. We hear a lot of stories about the buyers, but how about everyone else whose home values have fallen? How were they any smarter or less foolish?

This is how the world ends, not with a bang – but a whimper. The fact that a man that is supposed to deal with financal matters FOR HIS LIVELYHOOD and totaly throws bookeeping 101 out the window is almost beyond comprehention. Maybe he could find a highschool or junior collage accounting teacher and ask them their financal secrets that he can share with his readers. If someone like me that didnt go to collage and works a blue coller job can still put some money in the bank every paycheck and pay my bills and contribute to a 401k, then I hope to God the financal gurus of Wall Street can figure it out. I dunno’ maybe its Iowa conservitism but I honestly dont know anyone that bets on prices of any given commodity to rise in perpituity. I dont care if its housing, gold, corn, cattle, oil, or toilet paper, what goes up can/will go down. Any tangable good or property can be thought of as a comodity and the value of such is always in flux, nothing is an absolute in value. This is why I dont understand how the U.S. ecomomy was whacked in the knees. People had to know that it was going to end someday! They “didnt know the housing market was on a bubble” is unbeleveable. Sorry, enough of my tirade. Time to calm down. Take care everyone.

Most of the bloggers criticizing Edmund is basing the criticism on the facts in the story, which is probably OK as that is the information available. The problem is that we do not know the rest of the detail.

I have always been convinced that people do what they believe to be the correct thing …… I still have to meet somebody who goes out there and deliberately wastes their money on “bad” investments.

As I have it the human being consists of a number of dimensions. These include physical, social, academic, spiritual and economic dimensions. To criticize Edmond (or any other person for that matter) based on information as limited as that which is recorded in the article is unfair and unrealistic.

If my many years of financial consultancy taught me one thing, it is to get the story behind the story before you even start to assemble the basic facts. Once you have some basic facts about as many dimensions as possible then venture to start evaluating and making preliminary proposals for potential solutions. Remember there is NEVER only one solution and open your ears and your mind for more information when presenting potential solutions.

I read this original article on the day it was published, and I felt no sympathy for the man. The article certainly did not illustrate that “this could happen to anyone” or that “no one is immune.” Once the family was in deep debt crisis, the author explained that that month they charged $700 at JCrew. Really?? You know you’re in debt beyond your means and are struggling to afford the house and you can’t keep yourself out of clothing stores? The author then tries to justify his wife’s ridiculous spending by saying that she doesn’t “spend on herself” but she needs to buy high priced cheese, whatever her daughters want, and a bunch of other yuppie luxuries. Ridiculous. So many in the U.S. are still too far away from making the necessary shift from wants to needs and prioritizing basic expenses like housing over splurges at the clothing store or the gourmet grocer.

We all shared the notion that home prices will probably always go up. And if they went down, well, then we’re screwed. But we’re all screwed if a meteor hit earth, and you can’t be expected to live in fear, right? So we all gambled, because we thought losing your home was something that only happened to Other People.

Sakoro- on Megan McArdle’s discussion of this on her blog (on the Atlantic), some comments suggest that the author’s wife is not getting alimony because she initiated the divorce to take up with the author of the story. This story is fascinating because it’s about finance, but it’s more so about the consequences of divorce. There’s also the interesting, if inevitable, debate about whether it makes any sense for an adult to simply check out of the work force for twenty years- something that millions of women (and a smaller number of men) do every year. I don’t wish to start a “mommy wars” thread, but it certainly doesn’t help this family’s situation that, in addition to the kids, there’s an extra dependent with a spending habit.

So in the quote, he provides credentials as to why one should believe he’s a economic/financial expert, and a paragraph later (same quote!) provides the exact reason why such credentials are completely irrelevant.

He’s human. He makes mistakes. The greatest expert on a specific topic in the world could make a single poor judgment (for whatever reason) and ruin their credibility for the rest of their life.

I studied economics in college, and to be honest, I’m not sure if having a knowledge of Treasury policy and Wall Street is really that helpful when it comes to managing your own personal finance. Wall Street people and the Treasury officials, have to be very cautious about acknowledging weaknesses in certain markets (like the housing and mortgage markets) because they don’t want to cause a panic and drive prices down further than they should. I would say that someone who spends his workday in the middle of the hype has a disadvantage on making good personal finance decisions compared to someone in Iowa working a blue collar job.

In fact, blue collar Americans have born the brunt of recessions over the past 25 years, are more likely to have had first hand experience of being unemployed 6+ months and therefore understand the importance of keeping low fixed expenses and an emergency fund. I imagine this guy grew up pretty wealthy since his mom was able to give him $15,000 and he has never been badly affected by a recession (until now). Not having had first-hand experience with bad downturns and thinking you are somehow special and immune to financial problems and you and your wife are entitled to well-paying jobs can lead to the type of magical thinking he descibes in the article.

No, I’m not defending him, he’s still an idiot. Speaking for myself, seeing my blue collar father get laid off in 1991 has had a much bigger impact on how I manage my personal finances than all of the complicated economics classes I took in college.

That Andrews article was amazing, I actually want to get my hands on the full article (I think what was posted was an excerpt in advance of the weekend magazine).

My take away from Andrews situation was that even those he writes about economics and knew better he was in love and emotion was driving his (and his new wife’s) decision making process. They wanted to make a new home together in an expensive area and wanted to have enough room for their blended family and they spent despite the fact that the wife was not working at first and then had spotty employement and Andrews had extensive alimony and child support obligations. As I was reading that article, I just kept thinking about Dave Ramsey’s books and his preaching about how personal finance is way more about emotion than it is about the numbers.

One thing I thought was interesting was that the writer of the article seemed to blame his wife’s spending, at least partially, for the family’s financial woes. In reality, they had no hope of affording their mortgage. He was making $70,000 after child support/allimony and trying to make payment on mortgate close to half a million… impossible even if you are very thrifty.

How could any person think that paying $2,500 a month out of there $2,777 monthly take home pay is a good idea. His wife to be was not employed he says nothing about any other income. He was paying 90% of his income in his mortgage. How is he still employed as an economics journalist? He has absolutely no credibility. How could he have thought that he and his family could survive on $277 a month for all other expenses.

This did not have to happen–he made very bad choices that he has to live with. I make roughly the same as he does after alimony and I am a single mom of two with no other support from their dad. I don’t spend recklessly but don’t live a ruthlessly frugal life either. It can be done and done with a happy (and ordinary) life…

Sadly, he still doesn’t get it when he closes that he has been delinquent for 8 months now on his mortgage. I am guessing years from now, his children would rather have their home instead of the trip, clothes, and organic cheeses and juice. Just sayin’….

I searched his wife’s full name on pipl.com and found out that she amassed not only parking and speeding tickets, but tickets for failing to buckle in her child and failing to show up to court. She has judgments against her in excess of $20K. Strange that Edmund Andrews doesn’t address that. Everybody wants to blame his first wife for child support and alimony (the child support is for three boys and the alimony is probaby less than 1/3 of the $4K) but never mind that his new wife is a financial moron who can’t be reined in.

Maybe we should go back to how our parents and grandparents thought. After all they don’t have a college education and are not as “smart” as we and our adult educated children are that are still living at home with us burdened with debt and student loans that will take them years to pay off, how can that be an investment? My parents would never have put themselves in these ridiculous predicaments. What does that say about how far we have come?

Fancy instruments and thinking to get rich quick? Is this what college has bought and taught us? It is kind of scary if you think about it, I went to college to so I am not against college I think young people (even older people, I was a returning adult in college) do need it, however not in a way that creates a mentality that you are entitled to have more and better because of it. It should be about learning a set of skills, problem solving.

We have gone so far away from our parents ways, we do not save, do for ourselves, or working hard and do things just because it is the right thing to do. Worse yet we have taught our kids that they can have anything that they want, and we have catered to that for so many years we have lost touch.

Is JCrew really a necessity? What kind of fantasy are they letting there kids live, an asset is not something that you wear on your *ss.

After going back and reading the Andrews article yet again, I was left with a bad tast in my mouth. This pungent taste was a particularly bad one. It was the bitter taste of eliteism. Its not so much that this couple made incredibly imcompitant financal choices, its the attitude that they DESEARVED to live beyond their means. Somehow this has become all too common in the U.S. a stratification of the population depending on social/economic status. Yes, I do realise that we have always had different classes in this country. And I know that we always will have differnt economic status, but we have somehow regressed to the “Golden Age” were the monied have different rules to go by. Yet, we on this site all strive to improve our finances and lot in life. Monitary liquidity is what this site is all about and we would all like to be “rich”. But if we become wealthy will we abandone our common sense and good judgment. Will we become what we ridicule? I think not. We have free will. Will we emulate Trump, or Buffett. Will we live within our means and remember that just because we have a degree or a position it does not make us immune to reality? Sadly, it seems that many in this country live thier lives by how they feel about something. Not the rules of nature. Natural law says what goes up must come down, it abhores vacumes, all are equall before the law of nature. Fire, Flood, disease and misery dont care that you think you should have a new porche in the garage, the Four Horsemen as it were will not discriminate by race, creed, color, or your “status”. This is why the Andrews got in the mess they are in. They believed what others said about them. They had “Arrived”, he held a title at a prestigous paper, she had probalbly become accoustomed to a lifestyle of spend, spend, spend. Nothing could happen to them because they were of a class that deserved to be catered too. Thank God that we of the GRS family have not forgotten basic sound financal priciples and even when a catastrophy happens we are not afraid to face them head on! Thank you once again J.D. for this site and all you do for us. Take care everyone.

@rail #43
I would add to your comment it’s not only that they feel entitled to the nice house in the close-in neighborhood [there are equally nice house in further out suburbs that they could have afforded], J Crew clothes and fancy cheese. The part that REALLY strikes me as *elitist* is this idea that because he has a fancy job title at a well-known newspaper and a college education, he will never be affected much by a recession. Recessions only affect people working manufacturing in the Rustbelt or people working in construction.

FALSE, a college education is not much protection at all. And the NYTimes is in financial trouble as well, so who knows how long his position will last? I hope the book sells well, because otherwise, they don’t have a prayer of ever digging out of $50K in credit card debt + 8 months of missed mortgage payments.

I really liked this article. What I like the most was the he took responsibility for his situation. I would like it better had he been trying to pay something to his mortgage, but I guess if he did he wouldn’t qualify for the mortgage modification program. I hope he is saving that “mortgage payment” or at least using it pay down other debts.

The Andrews article really is a close-up (if incomplete) look at the underbelly of America’s upper-middle class (or those who aspire to be in that class). Though Andrews could easily be dismissed as an idiot, it’s important to remember that he’s just responding (quite predictably) to the traditions and imperatives of his educational, career, and cultural peers. I don’t believe I’ve seen such an extreme case among people I personally know, but I have seen similar approaches to keeping up with the Joneses and borowing heavily in order to craft an upper-middle lifestyle: lots of hat, no cattle. I hope the bubble eventually bursts for the Andrews family, and that they realize that a culturally rich and materially comfortable life doesn’t have to be attired in J. Crew. Perhaps someone should send Andrews a link to GRS?

I don’t think it’s always a matter of irresponsibility, or stupidity. The only way you can protect yourself from problems like this is to view your surroundings as hostile. The bank, the mortgage broker, the insurance agent, the realtor: they’re all trying to get a piece of you, and they don’t care what state you’re left in after they’ve gotten it.
Unfortunately, this guy fell into that trap, and compounded his situation by some very stupid spending habits (both him and his wife/friend).
Lots of people can’t manage living under the contrarian attitude (or siege mentality) that would be required to protect yourself from EVERY financially hazardous trend that everyone seems to be engaging in.
And finally, this guy’s hit bottom, so it is normal from him to have some sense of satisfaction at not being out on the curb. Even as I’m still making every mortgage payment, I can’t wish for things to get worse for him. Face it, people, he’ll probably have a harder time of things for the next few years. That should be enough for those howling for blood.

I read the article and believe that the author is making a silk purse out of a sow’s ear. The article is based on a book he wrote, due to be published next month. This is prepublication publicity. He will go on a book tour, make lots of money and pay off his debts with some left over. He just got to stick it to the lender for 8+ months. He will recover and do well. His wife sounds like a spendthrift bimbo, but perhaps she has other redeeming qualities.

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